BOJ Beat: BOJ Eyes Expanding Cheap Loans To Spur Bank Lending

By Tatsuo Ito and Takashi Nakamichi

Few Bank of Japan watchers expect the central bank to tweak its monetary policy when its board meets next week, but the members are likely to consider expanding a pair of lending programs they see as supporting the BOJ’s efforts to achieve a stable 2% inflation target.

To help get the economy out of 15 years of deflation, the BOJ wants commercial banks to reduce the amount of cash parked in safe Japanese government bonds and increase exposure to riskier assets such as loans. Under the two programs, the BOJ offers loans at an annual interest rate of 0.1% to commercial banks that increase lending to customers.

As an end-March deadline to the programs nears, the nine board members must decide either at their Feb. 17-18 or March 10-11 meeting whether to continue them.

“There aren’t any good and decisive reasons to end those programs now,” said Takahiro Sekido, Japan strategist at Bank of Tokyo-Mitsubishi UFJ.

Many of the board members, including Gov. Haruhiko Kuroda, appear intent on expanding the programs, as they have yet to produce their intended results. Commercial bank lending to firms and households has increased, but only gradually, with their outstanding loans rising by 2.5% in January from a year earlier.

Yet for the BOJ, continuing the programs can also help fend off criticism that the BOJ’s current policy has only flooded financial institutions with cash, failing to channel the money into the real economy.

But there are differences of opinion among members over the size and the duration of any expansion, a person familiar with the BOJ’s policy said.

Under an aggressive monetary easing policy introduced under Mr. Kuroda last April, the BOJ has pledged to double the size of the monetary base to Y270 trillion by the end of this year, mainly through massive purchases of government bonds. The BOJ’s lending through those facilities is also counted toward the monetary base, even though the contribution is small.

One of the two loan programs, designed to encourage commercial banks to lend more to the growth sector, has already reached Y3.3 trillion, near its Y3.5 trillion ceiling. The other program, in which the BOJ provides funds to banks without limit in accordance with an increase in their loans outstanding, has totalled only Y5 trillion so far in three fund-provisions operations, with only two more planned, suggesting the program will fall well short of its initial target of Y15 trillion.

Some commercial banks say they feel no urgency to turn to the BOJ programs, having other tools to raise low-cost funds amid a near zero interest rates.

“We won’t be in trouble without those programs. But we want to tap them if they will be extended,” said an official at a major Japanese bank. Some banks even complain that the BOJ’s financing has resulted in more pressure from customers to cut their loan margins, squeezing banks’ profits.

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